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BENGALURU : India has intensified scrutiny on US e-commerce companies, with the latest instance being the Enforcement Directorate (ED) asking Walmart Inc.-controlled Flipkart and its founders to explain why a $1.35 billion penalty shouldn’t be imposed on them for violating foreign exchange rules.

Flipkart and Amazon India have faced action from government agencies and local regulators since the start of 2020 on matters ranging from violations of foreign direct investment (FDI) rules to antitrust law.

“Multiple investigations and unfavourable policy continue to create friction for e-commerce in India. The government might be discouraging foreign investments when it should be focused on building global trade capabilities for small businesses and partnering with global e-commerce firms," said Ankur Bisen, senior vice-president for retail and consumer at consulting firm Technopak.

On Thursday, Reuters first reported that ED sent a show-cause notice to Flipkart, its founders and investors, in July for allegedly violating foreign investment rules.

ED has also investigated allegations that Amazon India and Flipkart violated foreign direct investment norms that bar overseas firms from multi-brand retail. ED’s Flipkart probe began in 2012 and found evidence of Foreign Exchange Management Act (FEMA) violations in 2014.

In January, ED also launched an investigation into Amazon India after receiving communication from the commerce ministry seeking “necessary action" against e-commerce companies about certain multi-brand business operations. “The notice was sent years after to ensure that the claims don’t slip through the cracks and the investigation continues," said an e-commerce executive, asking not to be identified.

The latest show-cause notice to Flipkart was sent to 10 individuals, board members and entities, including investors Accel Partners, Tiger Global, WS Retail, Flipkart Online, Flipkart Pvt. Ltd (Singapore parent), along with board members Subrata Mitra, Lee Fixel and founders Binny and Sachin Bansal, another person aware of the matter said, also requesting anonymity. Some of these investors have exited the firm. They have been given 90 days to respond to the notice.

Flipkart Online, floated by founders Sachin and Binny Bansal, shut operations in 2015, said a second e-commerce executive aware of the matter, requesting anonymity. WS Retail, once the sole seller on Flipkart, also separated from its parent three years ago.

The second e-commerce executive also said Flipkart’s previous ventures have been ‘indemnified’ by Walmart during the acquisition process, securing itself from legal liabilities.

“Flipkart is in compliance with Indian laws and regulations, including FDI regulations. We will cooperate with the authorities as they look at this issue pertaining to 2009-15 as per their notice," a Flipkart spokesperson said.

Tiger Global and Sachin Bansal did not immediately respond to Mint’s queries. Accel Partners could not be immediately reached.

“Both Amazon and Flipkart are conducting a preferential seller system on their respective marketplace, which is against the FDI in e-commerce policy. We demand ED send a similar notice to Amazon. We recommend the government to ban both Amazon and Flipkart till they follow FDI laws both in letter and spirit," said Sumit Agarwal, national secretary of trade body Confederation Of All India Traders (CAIT).

In January, income tax officials conducted tax surveys at the Bengaluru offices of Flipkart and Swiggy in connection with three third-party vendors that had allegedly evaded taxes. “If companies wish to operate in India, they ought to follow the law of the land. The investigations should be looked at from the government’s perspective trying to regulate a large upcoming sector. If the companies still feel they are in compliance, they can access legal remedies," said Shinoj Koshy, partner at Luthra and Luthra Law Offices.

However, the big fight continues with the Competition Commission of India (CCI), which directed a probe against Flipkart and Amazon for alleged violation of Section 3 of the competition law in 2020. Flipkart and Amazon India recently moved the Supreme Court after an unfavourable ruling by the Karnataka high court to stop the investigation.

Both Flipkart and Amazon India have argued that CCI did not comply with its threshold requirements of inquiring with these companies before ordering an investigation. Further, the e-commerce companies have also alleged that CCI has no agreements or evidence to prove that the former have given an undue advantage to sellers they hold indirect stakes in.

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